Use these six steps to create a direct materials budget to help you control your production costs
Step # 1: Set your production target
Decide exactly how much you're going to produce. This is your starting point. Base this on the amount of your products your customers order.
According to psppd.org.za, you must be realistic here. If you decide to produce unrealistic amounts of product, it could leave you with a financial loss. For example, you could buy materials to produce 5 000 units but only realistically make 2 000. This means you wasted money buying the extra materials.
Step # 2: Create a list of the raw materials you need
Decide what raw material you'll need to produce your product order. Determine how much of each material you'll need and how much it will cost you.
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Step # 3: Work out how much direct materials you'll have at the end of the quarter
It's important to have material left at the end of each quarter in case of emergencies. This is essential if your material supplier can't deliver in time to meet your client's next shipment. Work out how much ending stock you plan to have at the end of each month and add it to the amounts you'll need.
At the end of each quarter, decide how much material you would possibly need for the next quarter.
Step # 4: Add your ending direct materials and materials you'll need
Take the total raw material you'll need for the quarter and add the targeted end raw materials you expect to have.
Step # 5: Subtract your beginning direct materials from the total materials you need
Subtract the value of your beginning amount to get the estimated units of raw materials you need to buy.
Start the first day of a new quarter with the stock from the last day of the previous quarter. This is the beginning amount you will start your new quarter on.
Step # 6: Work out how much you'll need to spend on buying new materials
Calculate the cost of buying the raw materials by entering the estimated cost per unit. To see what each unit actually costs you, enter the actual cost per unit on your Excel sheet as well.
These six steps will help you create your direct materials budget.
But remember you can't just sign it off and send it out from there.
You still have to check your budget to make sure it will be effective.
Here are four elements you must check in your direct materials budget to make sure is.
Check these four elements in your direct material budget before you sign it off
According to psppd.org.za, you must check:
1. Every element of your budget is clear and easy for anyone to understand;
2. If you make rough estimations, you explained or supported them in the budget;
3. The accounting data you used to draw up the budget is realistic and accurate; and
4. You used the correct supporting documents to work out your costs.
Following these six steps and then checking your budget will help you control your production costs by ensuring you never have too much or not enough direct materials.
For a fully customisable direct materials budget template, go here